June 22, 2015

The future of TV


In "7 Deadly Sins: Where Hollywood is Wrong about the Future of TV," Liam Boluk tackles the past, present, and future of commercial television in the context of rising competition from over-the-top (OTT) services. By the time the networks are "ready" to fully embrace OTT, he argues, they'll have already been supplanted.

In terms of minutes viewed, at its current pace, Netflix "will become the most popular video provider in the US by the end of 2015," making it "bigger than two of the four major US broadcasters and twice as large as the largest cable network." Hulu and Amazon are larger than half of traditional cable offerings and growing.

Boluk nails down exactly where the impetus for "cord cutting" comes from; i.e., abandoning cable TV for OTT:

Since 2005 alone, the average pay TV household has more than doubled the number of channels it receives (to around 200), while the number of channels they actually watch has increased by only one (from 16.5 to 17.5).

It'd be interesting to analyze how much overlap there is in those 17.5 channels.

ESPN recently freaked out when Verizon announced the creation of à la carte TV packages that didn't include ESPN by default. ESPN had leveraged its popularity into requiring that its channels be part of the basic cable TV package, raking in seven bucks from every cable TV subscriber (this doesn't even sound legal to me).

Its reaction suggests ESPN fears that, given the choice, far more viewers can live without its content than in the good old days, when people got cable just to get ESPN (or rather, ESPN had the only original programming on cable).

Cable TV has definitely developed a featuritis problem: it's selling the sparkle of 200 channels, 90 percent of which is ultimately ignored. The gamble--that paid off up till now--was that by the time the consumer realized this, the cable bill was just another utility. Shrug and pay it.

But no longer. And another reason is a disruptor that nobody saw coming.

Sports was the original reality television. For a time it seemed that, like game shows in the 1950s, cheaply produced "scripted reality" shows were going to solve the networks' money flow problems. And before that, 24 hour news was going to dominate everything.

Really, that's what the "experts" said.

Now, Al Jazeera's half-billion dollar cable buy has crashed and burned. CNN runs a distant second to Fox News, neck-in-neck with MSNBC, which is pulling the lowest ratings in a decade. In Marge Simpson's words, "The story was first reported on CNN. Then the real news started reporting it all over the world."

"Reality TV" has certainly kept production costs low. But then came the "AMC Effect." AMC was a "stable, if unambitious Tier 2 cable network" that suddenly raced to the head of the pack with a series of audacious, one-hour original dramas, debuting Mad Men in 2007 and Breaking Bad in 2008.

AMC now has the most-watched scripted series across broadcast, basic cable and premium cable, The Walking Dead. As one might expect, this success has prompted all networks to view originals as essential to driving awareness, building a brand, retaining users and generating profits.

To be sure, football remains the perennial ratings winner, but it's a finite resource. The networks have to anchor their schedules with a franchise like NCIS, that still tops the broadcast television ratings after 12 seasons.

The curious paradox about "premium" content providers is how little original content they actually provide, compared to the hours that over-the-air (OTA) networks have to fill. In part, this is because every cable channel feeds at the same subscription fee trough as ESPN. All that matters is getting into the subscription package.

So how many hit shows do you need to maximize ROI? As it turns out, two highly-rated shows that draw the same audience may be less valuable than two lesser-rated shows that draw completely different audiences.

Many of today's original series are being cancelled not because they aren't good enough or because there's too much out there, but because the industry's business models and metrics haven't been updated to the on-demand, non-linear era. Until that changes, cancellation rates will only get worse.

Golf has been proving this point for decades. Professional golf fills the weekend afternoon airwaves during the summer, earning lousy rating in absolute terms (aside from a handful of marquee events). But golf is popular among a particular demographic that certain advertisers want very badly to reach.

This points to another downstream effect: the long-term impact on the whole ratings system.

The old approach was to poll households to find out who was watching what. But streaming providers know exactly who is watching what. The same way Amazon generates internal sales data superior to any New York Times bestseller list, OTT will ultimately disintermediate the whole Nielsen rating system.

Alas, without a big build-out of "last mile" infrastructure, OTT will have a hard time beating cable in terms of signal quality. And that might not matter. It's just as Clay Christensen predicted: "A low-end product doesn't need to be as good as a high-end one to drive it out of a market."

Here, though, the pressure comes from both the high and low end. Free over-the-air delivers the best HDTV signal. Content providers that are also ISPs can't improve bandwidth without making OTT all the more attractive, and they can't not improve ISP service with Google waiting in the wings.

Except that Google isn't exactly galloping into the ISP business (I wish they would at least trot a few miles north from Provo). For the time being, Comcast has a nice deal going, maximizing income from content and Internet services. Nothing drastic is likely to happen as long as the money keeps gushing in.

Even in the face of cord-cutting fears, regulatory uncertainty and increasing resistance to its unpopular merger proposal with Time Warner Cable Inc. [since abandoned], Comcast has delivered one blockbuster quarter after another, often blowing past analysts’ estimates.

Cable Internet services have incredible profit margins (meaning they incredibly overcharge). Robert Cringely speculates that cable ISPs might even welcome being "forced" to shed the heavy costs of providing content in favor of providing only bits, which would eventually turn every local ISP into a de facto CDN.

My prediction is that, in the near future, the last quarter century of cable programming will prove to have been a slowly growing bubble. Squeezed by OTA and OTT, cable will have to go à la carte. The number of channels viewers are willing to outright pay for will collapse.

Unless content providers can keep subscription costs low enough that customers don't worry about the bill. The easiest way to do that is to slash the number of offerings and leave the long tail to OTT. To paraphrase Hemingway, when the paradigm does shift, it's likely to be gradually at first and then all at once.

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Comments:

# posted by Anonymous Dan
The one advantage of traditional TV is channel switches are near simultaneous whereas with the streaming services setting up a new program may involve some tedious waiting. The reason being that with traditional TV all of the channels are being distributed and received at the same time while with streaming there is only one channel and changing it requires communication back to the provisioning and content servers. Solving this will be the key improvement that will nullify any advantage traditional broadcast (cable or OTA) has over streaming.

Another key software improvement will be the reintroduction of picture-in-picture, a feature abandoned when set-top boxes (STBs) became the standard TV platform. I suppose for cost considerations, STBs only provided a single tuner. With streaming customers will be able to customize their view with many pictures - the only limit being the available bandwidth.

My take of the TV entertainment market is that with viewers, advertisers, providers and producers there is a whole lot of money trading hands. The suppliers are competing to get a greater cut for themselves while expecting to maintain good revenues from the viewers and advertisers. The market balances these interests but I wonder how stable the situation is. I expect cable providers will do their best to ride the wave and make the transition to a predominately on-demand world as seamless as possible for their customers. They know they can't compete on price to win over the "cord-cutters" but they can manage the attrition by ensuring a high quality TV entertainment experience.

6/23/2015 6:16 AM